June 21, 2018 0

The Difference Between Good Debt and Bad Debt – What You Need To Understand

Posted by:Charles Bosse onJune 21, 2018

For the majority of Australian adults, debt is a part of our everyday lives. Whether or not you intend to further your skills by earning a degree, invest in a home for your family, or buy a vehicle so your family has transportation, obtaining a loan is very common simply because we don’t have sufficient money to pay for these costs upfront. It seems that most people takes out a loan at one point or another, so what’s the issue?

The issue is that too many people don’t realise the difference between good debt and bad debt, and as a result, they take on too much bad debt which can create significant financial problems in the coming years. Not all loans are created equal, and commonly you’ll discover a huge difference between your credit card interest rates and your mortgage interest rates. With time, your credit report will have a meaningful influence on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is crucial, along with keeping a healthy balance between good debt and bad debt.

Each time you make an application for credit, your loan provider will examine your credit report to analyse your financial history and then figure out whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed adversely by lending institutions, as it exposes poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s imperative that you are aware of the difference between good debt and bad debt.

What’s the difference?

The difference between good debt and bad debt is fairly straightforward. Good debt is generally an investment that will increase in value in time and will support you in constructing wealth or providing long-term income. However, bad debt usually decreases in value quickly and does not add any value to your wealth or produce a long-term return. To give you some understanding, the following offers some examples of each of these types of debts.

Property

The price of property has traditionally increased in time, so acquiring a home loan is considered a good debt because the value of your property will increase in time. Also, home loans generally have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your land can double or triple during the life of your loan.

Stock exchange

Obtaining a loan to invest in the stock market is also regarded as good debt considering that the returns on the stock exchange are traditionally favourable. Financial institutions normally view stock exchange loans as good debt because you are trying to enhance your wealth over time through a stable investment. Be careful though, it’s not a good idea to invest in the stock market unless you have an acceptable amount of knowledge.

Education

Another type of good debt is investing in your education, whether it be university or a trade, simply because it improves your skills and your ability to earn a higher income in the future. In Australia, the interest on HECS loans are equal to inflation which clearly makes them a very attractive option.

Credit cards

Credit cards are generally the worst type of debt an individual can have. Credit card debts illustrates to creditors that you have poor financial habits because the interest rates are incredibly high and you have nothing in value to show for your investment. Individuals with credit card debts frequently have issues in securing future credit from creditors.

Vehicles and consumer goods

Another type of bad debt is loans for cars and other consumer goods. When you get a loan to buy a car, it immediately decreases in value when you drive it out of the dealership. The same applies to consumer goods such as flat screen TVs, because you are essentially paying interest for something that depreciates in value very rapidly.

Borrowing to repay debt

If you find yourself in a situation where you have to take out a loan to repay existing debt, it’s best to seek financial guidance as quickly as possible. This type of borrowing will only cause further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you find yourself facing a mountain of debt, consult with the professionals at Fresh Start Solutions Sydney on 1300 818 575, or alternatively visit our website for additional information: http://freshstartsolutions.com.au/bankruptcy-sydney

 

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